Yellen: Fed Weighing Rate Hike, Admits Move Could Slow Growth

SAN FRANCISCO - The Federal Reserve is considering raising near-zero interest rates this year even though this may slow the U.S. recovery, Fed Chair Janet Yellen said Friday.

The Federal Open Market Committee is now "giving serious consideration to beginning to reduce later this year some of the extraordinary monetary policy accommodation currently in place," Yellen said in a speech in San Francisco, according to the prepared text.

Yellen emphasized that the FOMC was taking a "gradualist approach" as it weighs whether the economy is strong enough to weather higher rates.

Earlier this month, the Fed's policy arm opened the door to a federal funds rate hike as early as midyear, dropping the word "patient" in its post-meeting statement.

But a string of weak economic data, particularly in consumer spending, housing and manufacturing, has muddied the outlook for an increase in rates pegged at the zero level for more than six years.

We view Yellen's remarks as attempting to shift the debate from 'when' to 'how fast' and communicating a gradual tightening cycle."

— Barclays analyst Michael Gapen

The central bank took note of the sluggishness in mid-March, saying that growth prospects were more muted than they were just three months ago.

The U.S. central bank slashed 0.3 percentage points from its growth forecast for this year, to 2.3% to 2.7%, in part because American households had tailed back spending.

Still, the recovery from the Great Recession that ended in 2009 appeared on track enough to sustain a rate hike.

"With continued improvement in economic conditions, an increase in the target range for that rate may well be warranted later this year," Yellen said at a conference sponsored by the Federal Reserve Bank of San Francisco.

The Fed's ultra-low rate has supported a sizable reduction in labor market slack over the past two years, she said, and appears to be leading to "further substantial gains."

"A modest increase in the federal funds rate would be highly unlikely to halt this progress, although such an increase might slow its pace somewhat," the Fed chief acknowledged.

Her remarks came after the Commerce Department earlier in the day left unchanged its estimate of fourth-quarter gross domestic product growth at an annual rate of 2.2%.

The GDP number disappointed analysts, who expected a revision upward to a 2.4% pace that would show the economy had greater momentum going into 2015.

"The first quarter looks even softer, in part due to adverse weather, but abstracting from the vagaries of the quarterly data, real growth appears to be trending close to a respectable 3% pace," said Scott Hoyt of Moody's Analytics.